Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ARC Document Solutions, Inc. (NYSE:ARC) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for ARC Document Solutions
How Much Debt Does ARC Document Solutions Carry?
The image below, which you can click on for greater detail, shows that ARC Document Solutions had debt of US$51.8m at the end of December 2020, a reduction from US$60.0m over a year. However, it does have US$55.0m in cash offsetting this, leading to net cash of US$3.17m.
How Strong Is ARC Document Solutions' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ARC Document Solutions had liabilities of US$76.2m due within 12 months and liabilities of US$114.9m due beyond that. On the other hand, it had cash of US$55.0m and US$36.3m worth of receivables due within a year. So its liabilities total US$99.9m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$90.3m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. ARC Document Solutions boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
The bad news is that ARC Document Solutions saw its EBIT decline by 16% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. There's no doubt that we learn most about debt from the balance sheet. But it is ARC Document Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.